How To Understand Banker S Of China

Transcription

1 Understanding Bills Receivable, Factoring, and Banker s Acceptance Notes in China May 29, 2014 David Bassett Nigel Fletcher David.bassett@cfraresearch.com Nigel.fletcher@cfraresearch.com Jennifer Latz Jennifer.latz@cfraresearch.com

2 About CFRA CFRA, an independent research provider, is the global leader in forensic accounting research, analytics and advisory services Our mission is to uncover underappreciated differences between reported financial results and underlying economic reality to help our clients make sound investment and risk management decisions CFRA has been in operation since 1994 and we are a privatelyheld firm with operations in New York, London, Hong Kong, and Rockville, MD 2

3 CFRA Presenters Jennifer Latz, CPA Ms. Jennifer Latz is a senior analyst on the CFRA Asia research team. Prior to joining CFRA in 2011, Jennifer worked in the New York office of Ziff Brothers Investments for almost 5 years. Before ZBI, Latz performed financial due diligence for KPMG's Transaction Services Group. Jennifer holds a Masters in Professional Accounting from the University of Texas at Austin, and a B.A. from the University of Michigan.

4 CFRA Presenters Nigel Fletcher Mr. Nigel Fletcher joined CFRA in February 2012 as an analyst within the Financials Team focusing on non-us banks and insurers. Prior to joining CFRA, Nigel was an analyst at Silkroute Financial in London covering emerging market banks in the Central/Eastern European region. Before this he was an associate at Keefe, Bruyette & Woods in London, a financial sector dedicated investment bank. Nigel holds an LLM in International Commercial Law from the University of Nottingham and an LLB (Hons) in Law with Economics from Durham University.

5 CFRA Presenters David Bassett, CFA Mr. David Bassett is a forensic accounting analyst at CFRA. Before joining the CFRA Asia research team in 2011, he spent time covering the consumer and TMT space, as well as conducting Bespoke research, which is CFRA s custom research offering. David joined CFRA in David's research has been cited in several leading business publications including BusinessWeek, Barron's and the Wall Street Journal. David earned his B.S. in Business Management with an emphasis in Finance from Brigham Young University.

6 Asia Performance 6

7 Questions can be submitted to: or by using the submit questions functionality through the webinar tool. All questions will be answered anonymously at the end of the prepared discussion. 7

8 Part 1: Bankers Acceptance Notes

9 Understanding Banker s Acceptance Notes at Chinese Banks: Background Short-term debt instrument with an unconditional guarantee of a bank; Form is not unique, but use is: - accounting treatment; - re-discount and repo transactions; Concerns: - lower-quality deposits; - hides lending off-balance sheet; - has become a shadow currency. 9

10 Bankers Acceptance Notes The truth is, most BANs are not used to support real transactions, says a grinning shadow banker in Shenzhen. His company is one of many Chinese conglomerates whose business tentacles seem to span every industry from mining to tourism. But nearly half of its transactions are unprofitable: they are formalities, conducted solely for the purpose of acquiring BANs. From the Diplomat, December 12, 2013, article by Matthew Lowenstein, China s Shadow Currency 10

11 Reported data implies large portion of BANs may never get discounted; poses risk to Chinese banks Large portion may never get discounted at banks: - 19 banks have RMB 6,137bn of BANs; - sector exposure potentially RMB 8,768-9,442bn; - sector discounted bills within loan portfolio RMB 1,959bn. Non-traditional use poses a risk: - issued when there is no underlying transaction; - rolled-over at maturity; - remain in the system without being settled. 11

12 Interconnectedness poses a risk especially in a liquidity event (1) One BAN could be used for multiple transactions; Potential complexities if there was a default; Credit risk depends on if: - Bank issued BAN - Bank purchased BAN (bill discounting) - Bank received discounted bill as collateral Issuing bank ultimately responsible! 12

13 Interconnectedness poses a risk especially in a liquidity event (2) BAN example: Illustrative example of BAN build-up with collateral funded by prior BANs Assumed collateral as % of BANs 50% Discount rate BAN 1 Company A places collateral deposit with Bank A 50 Bank A issues BAN to Company A 100 Company A uses BAN to facilitate transaction with Company B 100 Company B wants cash now so sells to Bank B at a discount 95 5% BAN 2 Company B uses cash as collateral deposit with Bank C 95 Bank C issues BAN to Company B 190 Company B uses BAN to facilitate transaction with Company C 190 Company C wants cash now so sells to Bank D at a discount 181 5% BAN 3 Company C uses cash as collateral deposit with Bank E 181 Bank E issues BAN to Company C 363 Company C uses BAN to facilitate transaction with Company D 363 Company D wants cash now so sells to Bank F at a discount 346 5% 13

14 Interconnectedness poses a risk especially in a liquidity event (3) Discounted bill example: Collateral Collateral Funding Funding Sells bill Collateral Cash 14

15 Interconnectedness poses a risk especially in a liquidity event (4) If a negative event resulted in a loss in faith would there be enough funds to honor this commitment; 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 57.1% 52.4% 48.1% 46.8% 45.6% 44.2% 43.8% 34.6% 31.5% 29.0% 27.1% 24.3% 19.4% 17.5% 11.2% 8.3% 8.1% 5.5% 2.5% CITIC Bank Everbright HuaXia Huishang Ping An Bank Chongqing Minsheng Shanghai Pudong Bcomm Nanjing Merchants Industrial Beijing Ningbo BoC CCB ABC ICBC CRCB BANs / Cash (less reserves) + liquid investments Exposure sizeable as % of liquid assets for small/mid banks; Other connected transactions also present a risk. 15

16 Incentives: BANs aid deposit collection Collateral must be pledged for BANs; Additional deposits: - improves the loan-to-deposit ratio; - more loans potentially originated; Aids compliance with regulatory loan-to-deposit ratio. RMB m Pledged deposits for Delta Total pledged Delta Customer Delta (1) (2) banker's acceptance ytd chg deposits* ytd chg deposits ytd chg as % of as % of (1) (2) (3) (3) (3) ICBC N.D N.D N.A N.D N.D N.A 13,680,919 14,620, ,906 N.A N.A China Construction Bank 124, ,392 5, , ,974 26,276 11,444,302 12,223, ,735 1% 3% Agricultural Bank of China 70,409 89,842 19, , ,656 30,777 10,862,935 11,811, ,476 2% 3% Bank of China N.D N.D N.A 373, ,174 64,869 9,009,978 9,941, ,310 N.A 7% Bank of Communications N.D N.D N.A 399, , ,365 3,728,412 4,157, ,421 N.A 45% China Merchants Bank N.D N.D N.A N.D N.D N.A 2,532,444 2,775, ,832 N.A N.A Industrial Bank N.D N.D N.A N.D N.D N.A 1,813,266 2,170, ,079 N.A N.A Shanghai Pudong Development Bank N.D N.D N.A 345, ,781 4,976 2,134,365 2,419, ,331 N.A 2% CITIC Bank Corp 309, ,969-6, , ,134 32,743 2,266,734 2,664, ,662-2% 8% China Minsheng Bank 279, ,516-11, , ,203 25,089 1,926,194 2,146, ,495-5% 11% China Everbright Bank 184, ,803 23, , ,330 30,368 1,426,941 1,605, ,337 13% 17% Ping An Bank N.D N.D N.A 205, ,338 36,765 1,021,108 1,217, ,894 N.A 19% Hua Xia Bank 141, ,135-4, , ,050 4,106 1,036,000 1,177, ,592-3% 3% Bank of Beijing N.D N.D N.A 40,757 52,654 11, , , ,707 N.A 10% Chongqing Rural Commercial Bank 3,033 3, ,477 4, , ,883 53,373 0% 1% Bank Ningbo N.D N.D N.A 19,453 21,031 1, , ,278 47,701 N.A 3% Bank of Nanjing 22,018 28,195 6,177 29,829 33,856 4, , ,149 46,494 13% 9% Huishang Bank N.D N.D N.A 26,579 32,355 5, , ,798 33,255 N.A 17% Bank of Chongqing N.D N.D N.A 13,147 20,287 7, , ,801 34,758 N.A 21% * Total pledged deposits include collateral for bank acceptances, letters of credit and guarantees and other pledged deposits. 16

17 Incentives: Leverage can be increased without appearing at risk (outside of regulatory limits) All the credit risk of lending but off-balance sheet; Leverage of 19 bank shifts from 15.4x to 16.4x including BANs; Potential for lack of transparency as off-balance sheet exposures; Allow to side step any regulatory limits (i.e. loan quotas). 17

18 Incentives: Lower capital requirements Lower capital requirement than corporate loans; Benefits capital ratios; Effectively require half the risk-weight of corporate loans; RMBm Total off-balance Credit risk-weight Risk weight sheet contingent liab & amount of cont. liab & (credit risk-weight / credit commitments credit commitments total off bal sheet) ICBC 2,076,206 2,445, , , % 37.5% CCB 2,016,299 2,310, , , % 38.9% ABC 1,489,391 1,481, , , % 49.1% BoC 2,317,505 2,499, , , % 39.3% Bcomm 1,363,676 1,550, ,980 N.D 33.0% N.D Merchants 725, , , , % 37.6% Industrial 543, ,586 N.D N.D N.D N.D Shanghai Pudong 792, ,398 N.D N.D N.D N.D CITIC Bank 1,117,527 1,243, , , % 34.4% Minsheng 877, , , , % 38.5% Everbright 676, , , , % 42.4% Ping An 410, , , , % 36.3% HuaXia 373, ,967 N.D N.D N.D N.D Beijing 162, ,931 N.D N.D N.D N.D CRCB 6,920 8,287 1,547 2, % 35.5% Ningbo 78, ,418 24,493 31, % 30.6% Nanjing 79,291 98,951 N.D N.D N.D N.D Huishang 52,476 59,647 22,413 35, % 60.1% Bank Chongqing 27,335 38,001 9,518 5, % 15.7% 18

19 Who are the most exposed Chinese banks? (1) Everbright, CITIC Bank and Ping An have the largest exposure to BANs as a percent of 2013 adjusted assets; CFRA analyzes the exposure of the Chinese banks to BANs by adjusting assets to assume the exposure is on-balance sheet. RMB m Off-balance sheet Adjusted Adjusted assets / Bankers' acceptance Bankers' acceptance Asset / equity (x) bankers' acceptance total assets* equity (x) as % of adj assets as % of equity ICBC , ,048 17,883,250 19,244, % 1.7% 30.2% 25.6% China Construction Ban , ,499 14,317,676 15,723, % 2.3% 36.3% 33.6% Agricultural Bank of Ch , ,852 13,641,653 14,966, % 2.7% 52.9% 47.9% Bank of China , ,496 13,077,075 14,339, % 3.2% 46.0% 48.4% Bank of Communication , ,830 5,791,325 6,573, % 9.3% 135.8% 145.4% China Merchants Bank , ,816 3,709,498 4,371, % 8.1% 150.4% 133.4% Industrial Bank , ,710 3,643,327 4,130, % 11.0% 229.9% 225.0% Shanghai Pudong Deve , ,094 3,667,474 4,182, % 12.0% 290.4% 242.3% CITIC Bank Corp , ,944 3,625,946 4,337, % 16.0% 327.9% 301.6% China Minsheng Bank , ,849 3,798,655 3,749, % 13.9% 348.1% 255.9% China Everbright Bank , ,996 2,686,880 2,885, % 16.3% 356.5% 307.1% Ping An Bank , ,583 1,921,972 2,251, % 16.0% 372.0% 320.8% Hua Xia Bank , ,995 1,785,858 1,959, % 14.6% 397.5% 333.6% Bank of Beijing , ,579 1,201,914 1,454, % 8.1% 114.3% 150.2% Chongqing Rural Comm ,667 5, , , % 1.1% 14.5% 15.7% Bank Ningbo ,321 40, , , % 8.0% 173.3% 160.4% Bank of Nanjing ,348 68, , , % 13.6% 231.1% 254.7% Huishang Bank ,602 52, , , % 12.1% 227.5% 166.0% Bank of Chongqing ,461 36, , , % 14.9% 320.4% 269.5% Total of sample ,741,138 6,137,328 92,556, ,366, % 6.0% 105.4% 98.1% * adjusted assets defined as total assets + bankers' acceptances 19

20 Who are the most exposed Chinese banks? (2) Hua Xia, Minsheng and Chongqing have the largest total exposure as a percentage of 2013 adjusted assets; Total exposure = BANs + discounted bills + reverse repos collateralized by discounted bills. RMB m Reverse repos Discounted bills Total exposure Off-balance sheet Total exposure Total exposure Total exposure collateralized by within to discounted bills bankers' acceptance off & on-bal sheet off & on-bal sheet off & on-bal sheet discounted bills customer loans on balance sheet as % of adj assets as % of equity ICBC 73,358 61, , , , , , , , , % 2.8% 52.7% 42.0% China Construction Ban 94,612 19, , , , , , , , , % 3.2% 60.8% 46.3% Agricultural Bank of Ch 307, , ,706 97, , , , , , , % 5.6% 108.7% 99.0% Bank of China 0 22, , , , , , , , , % 4.3% 65.4% 64.1% Bank of Communication N/D N/D 64,769 60, , ,830 China Merchants Bank ,696 64,842 71,035 65, , , , , , % 10.7% 183.2% 176.6% Industrial Bank 370, ,626 17,042 14, , , , , , , % 19.9% 457.0% 407.6% Shanghai Pudong Deve 258, ,487 55,124 33, , , , , , , % 18.9% 465.0% 382.3% CITIC Bank Corp N.D N.D 74,994 64, , ,944 China Minsheng Bank 616, ,494 15,764 33, , , , ,849 1,219, , % 25.1% 723.4% 460.0% China Everbright Bank 184, ,638 12,643 13, , , , , , , % 20.9% 528.5% 394.0% Ping An Bank 64,649 55,938 10,410 12,338 75,059 68, , , , , % 19.0% 460.5% 381.7% Hua Xia Bank 237, ,022 2,605 5, , , , , , , % 20.9% 718.3% 475.8% Bank of Beijing 79, ,328 10,224 6,290 89, ,619 81, , , , % 16.4% 239.1% 304.2% Chongqing Rural Comm 26,389 14,649 5,256 1,508 31,646 16,157 4,667 5,808 36,312 21, % 4.3% 112.7% 59.5% Bank Ningbo 33,512 33,402 6,304 3,183 39,816 36,585 38,321 40,925 78,136 77, % 15.2% 353.3% 303.7% Bank of Nanjing 40,144 37,164 3,995 3,672 44,139 40,836 57,348 68, , , % 21.7% 409.0% 406.8% Huishang Bank 38,198 35,538 11,907 9,725 50,105 45,263 46,602 52,567 96,707 97, % 22.5% 472.2% 308.9% Bank of Chongqing 16,150 18,396 6,458 5,245 22,608 23,642 26,461 36,329 49,069 59, % 24.7% 594.2% 444.9% 20

21 Who are the most exposed Chinese banks? (3) Everbright, CITIC Bank, Chongqing and Minsheng are the HK listed Chinese banks with the largest BAN exposure relative to equity; 400% 350% 300% 250% 200% 150% 100% 50% 0% 334% 321% 307% 302% 270% 256% 255% 242% 225% 166% 160% 150% 145% 133% 48% 48% 34% 26% 16% HuaXia Ping An Everbright CITIC Bank Bank Chongqing Minsheng Nanjing Shanghai Pudong Industrial Huishang Ningbo Beijing Bcomm Merchants ABC BoC CCB ICBC CRCB 21

22 Questions can be submitted to: or by using the submit questions functionality through the webinar tool. All questions will be answered anonymously at the end of the prepared discussion. 22

23 Part 2: Bills Receivable

24 What are Bills Receivable? We don t commonly see them outside of Chinese companies. Official accounting definitions are evasive. Common nomenclature includes: Bills Receivable and Notes Receivable within annual / financial reports. The corporate side of BANs. Hengan 2013 annual report: Trade and bills receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. 24

25 What are Bills Receivable? (cont d) Bills Receivable may be further disaggregated into Commercial Acceptance Bills and Bank Acceptance Bills. Commercial acceptance - similar to Commercial Paper. Promissory note issued by corporates. No bank guarantee. Generally short-term; from a couple of days to not more than a year. Not secured by company assets; generally restricted to higher quality-rated companies. 25

26 What are Bills Receivable? (cont d) Bankers acceptance bills = short-term promissory note. Unconditional guarantee of a bank. From ZTE s 2013 annual report: 26

27 What are Bills Receivable? (cont d) Anecdotally, bills receivable typically have longer terms than accounts receivable. Bills receivable terms are generally 3-6 months as a loose guide. From the Nine Dragons Paper (Holdings) Limited 2013 annual report: The Group s credit sales to corporate customers are entered into on credit terms of 30 to 60 days.bills receivables from third parties are normally with maturity period of 90 to 180 days... 27

28 What are Bills Receivable? (cont d) Another example from the CNBM (3323.HK) 2013 annual report: The Group normally allowed an average of credit period of days to its trade customers.the bills receivable is aged within six months. 28

29 How Should We Analyze Bills Receivable? CFRA treats bills receivable as trade receivables for various ratio analysis. For example, in calculating how long it takes for companies to collect receivables (Days Sales Outstanding or DSO ), CFRA includes bills receivable as part of trade receivables. 29

30 How Should We Analyze Bills Receivable? (cont d) From Nine Dragons (2689.HK) Income Statement: RMB /13 06/13 12/12 06/12 Sales 14,713,844 14,013,489 14,725,654 14,535,761 Balance Sheet: RMB /13 06/13 12/12 06/12 Trade receivables: - Third parties 2,081,002 2,007,247 1,450,398 1,723,931 - Related parties 32,442 85,780 23,141 0 Bills receivable: - Third parties 3,808,826 3,507,291 2,062,697 1,195,924 - Related parties

31 How Should We Analyze Bills Receivable? (cont d) There is a difference of 47 days in H1/14 between CFRA-calculated DSO, which includes bills receivable, versus Management-calculated DSO, which excludes bills receivable RMB /13 06/13 12/12 Management DSO termed as turnover days of trade receivables * CFRA calculated DSO^ *Calculated as: days / (Half-year sales / Trade Receivables) ^Calculated as: days / (Half-year sales / ((Trade Receivables + Bills Receivables))) 31

32 How Should We Analyze Bills Receivable? (cont d) In Nine Dragons case, Management changed its definition of turnover calculation. It went from turnover days for debtors to turnover days of trade receivables Consciously excluding bills receivable as they rose turnover days of trade receivables (e.g. Mgmt. excluding bills receivable turnover days for debtors RMB /13 06/13 12/12 06/12 Management DSO CFRA calculated DSO^ *Calculated as: days / (Half-year sales / Trade Receivables) ^Calculated as: days / (Half-year sales / ((Trade Receivables + Bills Receivables))) 32

33 What are the Risks? From China National Building Material Company Limited s 2013 annual report (page 137): The credit risk on bills receivable is limited because the bills are guaranteed by banks for payments and the banks are either the state-owned banks or other creditworthy financial institutions in the PRC. From the Skyworth Digital Holdings Limited 2012 annual report (p. 94): the Group will only accept bills issued by certain licensed banks with high credit ratings. Before accepting any bills from customers, the Group will verify the validity of each bill. In this regard, the directors of the Company consider that the Group s credit risk associated with its bills receivable is limited. 33

34 What are the Risks? (cont d) Should we treat bills receivable as cash? We don t typically see the language from CNBM and Skyworth on the previous slide. Some things to consider with respect to bills receivable risks: What CNBM considers as a creditworthy financial institutions in the PRC may be highly subjective It is not clear the extent to which bills receivable are regulated. Are Chinese trust companies, which are much less regulated than Chinese banks, also issuing bankers acceptances? 34

35 What are the Risks? (cont d) Some things to consider with respect to bills receivable risks (cont d): Are bills receivable easily counterfeited? What happens to companies holding a large amount of bills receivable if liquidity tightens in China? How much do bank customers need to put down as a deposit, if any, to receive a banker s acceptance note? Are the credit checks robust? How many hands has the bills receivable passed through before getting to the Company you are analyzing? 35

36 Big Picture Summary Include Bills Receivable in DSO calculation Be aware of companies with a big discrepancy in your DSO versus Mgmt.'s due to exclusion of Bills Receivable How safe are Bills Receivable ask the Company which banks are guaranteeing them. Some companies / industries may be more at risk if there is liquidity volatility in China due to heavy / disproportionate use or acceptance of Bills Receivable 36

37 Questions can be submitted to: or by using the submit questions functionality through the webinar tool. All questions will be answered anonymously at the end of the prepared discussion. 37

38 Part 3: Receivables Factoring 38

39 What is Factoring? Factoring is essentially selling a receivable in order to receive cash at an accelerated pace instead of waiting for the customer to pay or the bill to mature. Anecdotally, we see more factoring in Asia than in other geographies. Two types of factoring: Recourse vs. nonrecourse factoring. 39

40 Factoring with Recourse Company retains risks and rewards of ownership. Cash inflow is considered a borrowing, in the financing section of the cash flow statement. Receivables remain on balance sheet, offset by a liability for the borrowing. ZTE s Balance Sheet Receivables and cash flow from operations (CFFO) are unaffected. Thus, we are less interested in factoring arrangements with recourse. 40

41 Factoring without Recourse Significant risks and rewards of ownership are transferred. Receivables are derecognized (i.e. removed from the balance sheet). Receivables balance and collection ratios (e.g. DSO) are lower as a result of factoring. Cash inflow is considered a collection of the original receivable and is included in cash flow from operations. Cash flow from operations benefits if the outstanding balance of factored receivables increases in a period. Because receivables and cash flow from operations (CFFO) are affected, we are more interested in factoring arrangements without recourse. 41

42 Effect of Factoring on the Cash Flow Statement Factoring without recourse Accelerates the collection of cash inflows in the operating section. Since factoring affects only the timing of the collections, in the long run, cumulative CFFO is unchanged. Factoring with recourse Cash received is considered a borrowing and included in the financing section, until the receivable is collected from the customer (and included in the operating section). ZTE s annual report: 42

43 Discounting and Endorsing of Bills Receivable When bills receivable are sold, the term is usually discounting as bills are transferred to banks at a discount. Same recourse vs. non-recourse framework. Bills receivable in China may be endorsed to suppliers to pay off accounts payable. As disclosed in GCL-Poly Energy s 2013 report. 43

44 Discounting and Endorsing of Bills Receivable (Cont d) Skyworth s 2013 interim report: 44

45 Adjusting DSO and CFFO for Factoring Alcatel-Lucent adjusts its CFFO, based on the outstanding balance of factored receivables: To calculate adjusted DSO, add the outstanding balance of sold receivables to receivables on the balance sheet Outstanding sold receivables increased by 176m ( 952m- 776m), boosting CFFO by an equal amount. Companies rarely provide the cash flow impact from factoring, as Alcatel-Lucent does. However, it can be estimated if the balance of factored receivables is disclosed. 45

46 FASB Rule Change Reveals Reason for Some Securitization Programs The FASB issued a standard making it more difficult to derecognize securitized receivables. Under the new standard, BG cannot derecognize securitized receivables. Due to the new rule, BG stopped securitizing receivables. BG acknowledged there was no material impact on its financial position. Accounting for Transfers of Financial Assets In June 2009, the FASB issued a standard that amended a previously issued standard to improve the information reported in financial statements related to the transfer of financial assets and the effects of the transfers of such assets on the financial position, results from operations and cash flows of the transferor and a transferor's continuing involvement, if any, with transferred financial assets. In addition, the amendment limits the circumstances in which a financial asset or a portion of a financial asset should be derecognized in the financial statements of the transferor when the transferor has not transferred the entire original financial asset. Upon adoption of this standard on January 1, 2010, all trade accounts receivables sold after that date under our accounts receivable securitization programs (the "securitization programs") are included in trade accounts receivable and the amounts outstanding under the securitization programs are accounted for as secured borrowings and are reflected as short-term debt on our consolidated balance sheets. As a result of this adoption, we reduced our utilization of these programs and either terminated or allowed certain of these programs to expire. The adoption of this standard did not have a material impact on our financial position, results from operations or cash flows. (Bunge BG.US K) Although presumably there was no economic impact from the new standard, BG stopped securitizing receivables. It seems these securitization programs were designed for one purpose: to show lower borrowings & receivables and (perhaps) boosting CFFO. In other words, optics. 46

47 Varying Disclosures on Factoring: Almost Nothing Li & Fung s annual report had only one boilerplate sentence on factoring. When CFRA asked Li & Fung if factoring led to the decline in receivables, the Company responded: Major causes for the fluctuation in DSO include: (i) Trade receivables factored to external financial institutions without recourse would be regarded as true sales and being derecognized. It is true that derecognition of trade receivable factored without recourse would shorten the DSO. The Group had no public disclosure on the amount of receivable factored without recourse. We are not allowed to make selective dissemination of such financial information to you.. 47

48 Varying Disclosures on Factoring: Factoring Cost Lenovo discloses its factoring cost as a component of finance costs. Tracking this cost can provide a directional sense of a company s factoring activities. 48

49 Varying Disclosures on Factoring: Amount Factored During the Period Zoomlion discloses the amount factored during the period: During the year ended 31 December 2012, trade receivables of RMB4,830 million (2011: RMB1,000 million) were factored to banks and other financial institutions without recourse, and were therefore derecognised. While this disclosure is useful, it does not allow for a precise estimate of DSO and CFFO, as there is no way to know how much would have been collected by period end. 49

50 Varying Disclosures on Factoring: Amount Outstanding at Period End Sinopharm discloses the factored amount outstanding at period-end: As at 31 December 2013, outstanding accounts receivable of RMB3,989,172 thousands (2012: RMB2,620,273 thousands) were derecognized under the accounts receivable factoring programs without recourse. An increase in the outstanding balance implies that the amount factoring during the period exceeded collections. This is the most helpful disclosure as it allows adjustment of DSO and CFFO (as discussed with Alcatel-Lucent). 50

51 Continuing Involvement In some arrangements, companies do not retain or transfer all the risks and rewards of ownership of the factored receivables. In such cases, a company may derecognize the receivables but retain a continuing involvement on the balance sheet. ZTE s 2012 annual report: If there is default in the payment, the Company would bear the first 20% of default losses on the factored The continuing involvement of RMB1,549m amounted to 20% of the factored amount (RMB7,745m), representing the company s remaining exposure. The difference (RMB6,196m) was derecognized. amount unless the Company breaches the Agreements or the factoring conditions are not satisfied. As at 31 December 2012, under the above arrangements, accounts receivable due from the customer amounted to RMB7,745,078,000 (2011: RMB7,643,736,000) among which RMB6,196,062,000 (2011: RMB6,114,989,000) has been derecognised from the consolidated statement of financial position as these receivables have fulfilled the derecognition conditions as stipulated in HKAS 39. An associated liability of RMB1,549,016,000 (2011: RMB1,528,747,000) has been recognized in the consolidated statement of financial position to the extent of the Company s continuing involvement. 51

52 Gains from Factoring - ZTE Corp. (763.HK) Why isn t this gain in the section for gains? Why was the gain included in revenue? Gain of RMB838 million (32% of PRC GAAP operating income in 2010) disclosed in the footnote of a footnote. More details in note 25? No mention of the gain. 52

53 Questions can be submitted to: or by using the submit questions functionality through the webinar tool. All questions will be answered anonymously at the end of the prepared discussion. 53